World Bank. Photo | courtesy.
The World Bank now urges the government to exempt workers earning less than Sh32,333 from paying housing tax and Social Health Insurance Fund (SHIF) to boost disposable income for low income earners.
The Bretton Woods institution said that the deductions for SHIF and housing tax are unpopular. The levies have significantly cut the workers net income and increased the staff costs for employers as the government requires employers to match the housing levy of 1.5 percent of workers monthly pay.
In its latest public finance review for Kenya, the multilateral lender says these levies are to be blamed for the reduction in formal employment, as companies struggle to pay staff costs. It says that the exemptions will have minimal effects on average tax rates.
“A reform that solely repeals the housing levy for low earners; those earning less than half the average wage without altering tax rates would have a minimal effect on average tax rates, leading to a marginal revenue decline of 0.08 percent of total PIT (personal income tax) and social security contribution revenues,” the review notes.
The World Bank further said that the tax cuts can be recouped by adding more taxes to high income earners as outlined in the review, especially those earning more than Sh9.6 million annually.
Regarding SHIF, the lender suggests that the government should prioritize collecting contributions from formal sector workers while subsidizing payments for informal workers and low-income earners.
